Loading document…
Opening in Pages for Mac...
Your browser isn’t fully supported.
For the best Pages for iCloud experience, use a supported browser.
Learn More
Cancel
Continue
T
Lecture Notes: Smith,
Marx, Keynes:
A View of the History of
Economic Thought
(UNFINISHED)
J. Bradford DeLong
University of California at Berkeley
, WCEG,
& NBER
brad.delong@gmail.com
http://delong.typepad.com/
+1 925 708 0467
First Full Draft: ????:
44402 words
1. Smith, Marx, Keynes
he aim of this course is to examine
the history of economic
thought through the lens of three major economic thinkers: Adam
Smith, Karl Marx, and John Maynard Keynes
, each of whom wrote
one long, diffi cult, but undeniably great book. Adam Smith in 1776
published his
An Inquiry into the Nature and Causes of the Wealth of
Nations
.
Karl Marx in 1867 published his
Capital: A Critique of Political
Economy
(volume 1). John Maynard Keynes in 1936 published his
The
1
2019-12-03 44402 words
A
General Theory of Employment, Interest and Money
(note the absence of
the Oxford comma from Keynes’s title: Keynes was a British academic
but not one from Oxford but rather from the University of Cambridge). In
addition, read Robert
Heilbroner’s excellent (if old)
The Worldly
Philosophers
,
a short survey of the history of economic thought,
for
context and background
.
Smith’s
An Inquiry into the Nature and Causes of the Wealth of Nations
,
Marx’s
Capital: A Critique of Political Economy,
and
Keynes’s
The
General Theory of Employment, Interest and Money
are great books to
have read, if not easy books to read
. They are, in fact, downright painful.
(Heilbroner’s
The Worldly Philosophers
is, by contrast, painless, easy, and
still great
.
)
Learning how to read great but diffi cult books and make sense
of them on your own is a very valuable skill to learn, but a diffi cult one to
teach in any way but by doing it. Moreover, a great book is a great book
only if the reader is ready and prepared to read it
—and so learning to
fi gure out how to become the kind of reader to appreciate a particular great
book is another important skill to learn as well.
2. Economic Sides of Smith’s Philosophy
2.1. Starting Points in Human Nature
dam Smith starts with the observation that humans are largely but not
exclusively self-interested creatures
: we are, largely but not
exclusively greedy
. Yet we have a complex and sophisticated societal
division of labor.
And t
hat division of labor is essential to our prosperity.
Indeed, it is essential to our survival: drop one or two of us into the Sierra
Nevada, even in summer, and we will quite likely die. Drop 100 of us, and
we will quite likely survive, and even flourish.
How can animals that are by nature greedy nevertheless cooperate on a
2
2019-12-03 44402 words
large scale? That is the deep moral-philosophical question that we can see
both of Smith’s big books—his
The Theory of Moral Sentiments
and
An
Inquiry into the Nature and Causes of the Wealth of Nations—
as aimed at.
As Robert Heilbroner puts it in his
The Worldly Philosophers
, Smith:
is interested in laying bare the mechanism by which society hangs together.
How is it possible for a community in which everyone is busily following
his self-interest not to fly apart from sheer centrifugal force? What is it
which guides each individual
’
s private business so that it conforms to the
needs of the group? With no central planning authority and no steadying
influence of age old tradition, how does society manage to get those tasks
done which are necessary for survival?...
Adam Smith says that our ability to create and maintain a complicated
societal division of labor that is so productive rests on three facets of
human nature:
1. language, that makes us an anthology intelligence—what one of us
knows or learns, pretty quickly all of us within and many of us without
earshot will quickly learn;
2. hierarchy, in that we tend to form and respect weak dominance
hierarchies in which we can command and obey;
3. gift exchange: we bind ourselves by forming gift-exchange
relationships, what Adam Smith called our “natural propensity to truck
and barter“. We fi rmly expect to be and are very happy when I we trade
favors with each other, and we are uneasy when we feel as though we are
always giving or always receiving, for we want the exchange of gifts and
favors to be reciprocal, and roughly balanced.
Back in our environment of evolutionary adaptation, we could form gift-
exchange relationships only with a few: our close neighbors, our good
friends, and our near kin. Trust, you see, is necessary for a long-term gift-
3
2019-12-03 44402 words
H
exchange relationship, and short-term such relationships are rare because
each has to have and be willing to give up something the other wants or
needs right now. And since we are largely self interested, trust is hard to
generate and maintain without other binding social ties.
2.2. From Human Nature to Human Society
ence the key importance of the human cultural invention of money
in
forming our large-scale human society
: money means that any one of
us can make a short-term one-shot exchange relationship with any other
one of us, someone who we may well never see again. Money, you see, is
manufactured trust, and it allows us to extend our societal division of labor
to encompass, indirectly, nearly everybody else in the world.
For example, consider the 30-foot bronze statue of
Athen
e
P
ro
makhos
—
Athena Fighting-in-Front—that the council and people of Athens had cast
and installed on the Acropolis around -450. The Greek geographer
Pausanias wrote that anyone approaching Athens by sea by day could see
her gleaming helmet and the tip of her spear as soon as they had rounded
Sounion Head at the southern tip of Attika. 70 tons of bronze supposedly
went into the statue, which survived until 1204—63 tons of copper, 7 tons
of tin. Copper was abundant. But where in the -5
th
century were the
artisans of Athens to fi nd 7 tons of tin? The historian Herodotos states that
he could fi nd nobody in Athens who knew where the tin was coming from:
all anyone could say was that the ships had picked up the tin, already
mined, in Sicily, and that they thought it came from “tin islands” in the
ocean on the other side of Europe. But he could fi nd nobody who would
claim to have actually seen these tin islands, or this ocean on the other side
of Europe. So he doubted the stories.
The answer, of course, was that the tin was in Cornwall, at the
southwestern tip of the island of Britain. The societal division of labor, as
governed by the market, was a mechanism that “knew” that 7 tons of tin
4
2019-12-03 44402 words
A
needed to be mined in Cornwall and then shipped, probably via the
English Channel-Seine-portage-Rhone-Mediterranean route, to Athens via
Sicily. And so it happened. But, apparently, nobody anywhere in the value
chain knew its entire extent. The market knew things that no human
individual knew. And this was almost 2.5 millennia ago: the market knows
much, much, much more now.
Language, weak dominance, gift exchange, and money have enabled us to
progress from perhaps 10,000 of us 70,000 years ago living at a global
average living standard of perhaps three 3.5 dollars a day to today’s world-
girdling societal division of labor now 7.5 billion strong, with a global
average standard of living no about $35 a day. We are now, collectively, on
average, at least 10 times as well-off and 750,000 times as numerous as
we were 70,000 years ago back in the environment of evolutionary
adaptation when we last passed through a Darwinian bottleneck.
2.3. Society & the “System of Natural Liberty”
dam Smith was a genius because he had a truly game-changing
insight into how our societal division of labor should be organized.
As far as the production and distribution of our collective material wealth
is concerned, you see, most of what we need and want is both excludible
and rival.
If something is
“
excludible
”
, that means we can assign it an owner—some
one of us can be designated to control it, and to decide on its use, or decide
to transfer
“
ownership
”
of it to something else.
If
something is excludible,
we can push the decisions about how it is to be used out to the periphery
of society, to the people on the ground who know what is going on, rather
than have the decision made by some centralized bureaucracy clueless
because of its inability to reliably judge information conveyed to it at
third- or fourth-hand.
Having ownership makes sense if information about
what is going on is dispersed and hard to assemble: giving control to
5
2019-12-03 44402 words
people on the spot is then a very good idea.
If something is
“
rival
”
, that means that one person's use of it forecloses the
opportunities of others: if I am using this iPhone, you cannot be using the
same iPhone.
I
f a good is rival, that one of us is using it diminishes the
opportunities and possibilities available to others
. That makes
them
poorer.
Thus
it makes sense to charge a price for somebody using
a rival
commodity. That makes
them feel in their gut the effects of their decisions
on the opportunities open to others
. Charging prices is a way to align
individuals’ incentives about whether it is worth it for them to make use of
a commodity with the effects of their decision on the overall well-being of
the
society.
Hence, Adam Smith argued in his
Inquiry into the Nature and Causes of
the Wealth of Nation
s, the wealth of nations is most greatly enhanced by
following the dictates of what
he named
the System of Natural Liberty
—
“
liberty
”
because it
leaves
people free to do what they wanted with their
labor and their possessions,
“
natural
”
because it
conforms
with human
nature, "system" because it
can
be and
is
extended to the status of a
general principle. Let people decide what they want to do with their things
and their labor, and they
arrange themselves in a large highly-productive
societal division of labor. Self-interest focus
es
people on creating value.
Competition curb
s
any
distracting
focus of self-interest on accomplishing
exploitation.
This “System of Natural Liberty” is, Smith argues, good. As Heilbroner
summarizes:
Self-interest
…
drives men to action
…. [But]
a community activated only by
self-interest would be a community of ruthless profi teers. This regulator is
competition, the socially benefi cial consequence of the conflicting self-
interests of all the members of society. For each man, out to do his best for
himself with no thought of social cost, is faced with a flock of similarly
motivated individuals who are in exactly the same boat
….
A man who
6
2019-12-03 44402 words
permits his self-interest to run away with him will fi nd that competitors
have slipped in
…
will fi nd himself without buyers in the one case and
without employees in the other. Thus very much as in the
Theory of Moral
Sentiments
, the selfi sh motives of men are transmuted by interaction to yield
the most unexpected of results: social harmony
….
The
…
market is that it is
its own guardian. If output or prices or certain kinds of remuneration stray
away from their socially ordained levels, forces are set into motion to bring
them back to the fold. It is a curious paradox which thus ensues: the market,
which is the acme of individual economic freedom, is the strictest task
master of all
…
This leads to a fraught question: Is this a
theological
point? Is the fact that
acting “naturally” in the sense of giving market exchange free rein
produces good results evidence that there is a benevolent Providence out
there? Is this a
teleological
point? Are, in some sense, money and gift-
exchange aimed at creating prosperity? How is it that processes that are
not human—that lead to consequences not desired directly by any human
—have a mind of their own, and lead to good ends? It is indeed a marvel
that, as Smith puts it, in his theory at least:
[While] every individual… endeavours… to direct that industry that its
produce may be of the greatest value… labours to render the annual revenue
of the society as great as he can…. He… neither intends to promote the
public interest, nor knows how much he is promoting it…. He intends only
his own security…. He intends only his own gain…. In this, as in many
other cases, [he is] led by an invisible hand to promote an end which was no
part of his intention…”
It is a marvel. But what kind of a marvel is it?
It is not that Smith is opposed to government. Government is necessary to
protect property, and to enforce contracts: people—most people—will
respect others’ property and keep their own contracts, most of the time.
But for the non-most people and at the non-most times we need the police,
hence we need government. We need public works. We need public
7
2019-12-03 44402 words
A
education. We need national defense. Adam Smith is very clear on all of
these. In fact, Book V of the
Wealth of Nations
on what the government
should do and how it should do it is the largest of the fi ve parts of the
book.
But
, Smith is certain,
attempts of some centralized bureaucrat to
undermine the System of Natural Liberty in its proper sphere—to
direct
who should do what when and where
—
were likely to produce not wealth
and prosperity but poverty and misery.
2.4. Adam Smith & Poverty
dam Smith loathes poverty. Adam Smith is eager to create a society in
which there is no poverty. Adam Smith spends a substantial amount
of time investigating the course of poverty over time. For example, he
takes time and care to write:
During the course of the last century, taking one year with another, grain
was dearer in both parts of the united kingdom than during that of the
present
…. I
t is equally certain that labour was much cheaper. If the
labouring poor, therefore, could bring up their families then, they must be
much more at their ease now. In the last century, the most usual day-wages
of common labour through the greater part of Scotland were sixpence in
summer, and fi vepence in winter
.…
Through the greater part of the Low
country, the most usual wages of common labour are now eight pence a-
day; tenpence, sometimes a shilling, about Edinburgh
….
In England, the
improvements of agriculture, manufactures, and commerce, began much
earlier than in Scotland. The demand for labour, and consequently its price,
must necessarily have increased with those improvements. In the last
century, accordingly, as well as in the present, the wages of labour were
higher in England than in Scotland. They have risen, too, considerably since
that time, though, on account of the greater variety of wages paid there in
different places, it is more diffi cult to ascertain how much
….
Not only grain
has become somewhat cheaper, but many other things from which the
industrious poor derive an agreeable and wholesome variety of food have
become a great deal cheaper
.
Potatoes
…
cost half the price which they used
to do thirty or forty years ago. The same thing may be said of turnips,
carrots, cabbages; things which were formerly never raised but by the
8
2019-12-03 44402 words
spade, but which are now commonly raised by the plough. All sort of
garden stuff, too, has become cheape
r….
The great improvements in the
coarser manufactories of both linen and woollen cloth furnish the labourers
with cheaper and better clothing; and those in the manufactories of the
coarser metals, with cheaper and better instruments of trade, as well as with
many agreeable and convenient pieces of household furniture
…
Which he then cross-checks with elite gossip:
The common complaint that luxury extends itself even to the lowest ranks
of the people, and that the labouring poor will not now be contented with
the same food, clothing, and lodging which satisfi ed them in former times,
may convince us that it is not the money price of labour only, but its real
recompense, which has augmented…
Having established that poverty has diminished, he next launches a full-
bore attack on all those who claim this is a bad thing:
Is this… to be regarded as an advantage or as an inconveniency?…
Servants, labourers, and workmen… make up the far greater part…. What
improves the circumstances of the greater part can never be regarded as an
inconveniency to the whole. No society can surely be flourishing and happy,
of which the far greater part of the members are poor and miserable
…
And then he makes a strong appeal to human solidarity, and to the
reciprocal obligations humans undertake by entering into the gift-
exchange relationships that knit society together:
It is but equity, besides, that they who feed, clothe, and lodge the whole
body of the people, should have such a share of the produce of their own
labour as to be themselves tolerably well fed, clothed, and lodged
…
“It is but equity, besides…”
This is a
very strong appeal to human
solidarity
. It is c
oming from someone often seen as
and sometimes
dismissed as
an apostle of human self-interest
.
9
2019-12-03 44402 words
S
2.5. Adam Smith & Inequality
2.5.1. Inequality Generated Outside the Market
mith’s fi rst way of minimizing the importance of inequality—or at
least minimizing the responsibility of the market and of the economy
for fi ghting inequality—is to argue that inequality springs from politics
and sociology rather than from market economics. I
nequality
arises from
the role that hierarchy and command-and-control play in the mixed-up
processes that are human society. The society of England becomes more
unequal because
William the Bastard from Normandy and his thugs with
spears
—300 families, plus their retainers—kill King Harold Godwinson,
and
declare
that everyone in England owes him and his retainers
1/3 of
their
crop
. The society of England becomes more unequal because
Queen
Elizabeth I Tudor grants a monopoly over trade with America to Sir Walter
Raleigh. Why? Because he had successfully flirted with her.
These are not
economic
processes. These are not closely connected with the “system of
natural liberty” than is the market economy.
Indeed, the system of natural liberty is only one way you can organize
society. Societies can be organized as ones of feudal lords and peasants, as
priests and worshippers, robbers bands and their victims. But these ways
of organizing society are impoverishing and, Smith claims in his very
naming of his system the “System of Natural Liberty”—unnatural. Dugald
Stewart quotes from one of Smith’s lectures that, at least in the lecture hall
at Glasgow in 1749, Smith was blunt:
Little else is required to carry a state to the highest degree of affluence from
the lowest barbarism but peace, easy taxes, and a tolerable administration of
justice; all the rest being brought about by the natural course of things
…
I believe that the later Adam Smith would note that “tolerable
administration of justice” covers a lot of ground: the later books of
An
Inquiry into the Nature and Causes of the Wealth of Nations
are very long
10
2019-12-03 44402 words
